Along with this change, the Finance Bill also introduced a new section called 194DA. In this section it was announced that a Tax Deducted at Source (TDS) will be applicable for insurance plans on maturity.
The premium paid for life insurance policy qualifies for a tax benefit up to Rs. 1.5 lakh under section 80C. However, if the amount of premium paid in a financial year is in excess of 10 per cent of the sum assured then tax is deducted on the premium amount up to 10 per cent of the sum assured.
For example, if you pay Rs. 10, 000 as annual premium then it must buy you an sum assured of at least Rs. 1 lakh. But, if it buys an sum assured of Rs. 80,000 then 10 per cent of Rs 80,000 i.e. Rs. 8,000 will be eligible for tax deduction under section 80C.
Again under section 10 (10D) death benefit of an insurance policy is tax exempted. But apart from this, any other benefits like maturity benefits is exempted from tax if the premium paid does not exceed 10 per cent of the sum assured.
If you are paying Rs. 10,000 as premium then the sum assured should be at least to the tune of Rs 1 lakh. If it's less than that, then you will be taxable upon the maturity of the policy.
Previously, the premium limit for tax benefits was fixed at 20 per cent of the sum assured. But during this budget the Finance Minister has changed the limit to 10 per cent in order to to increase the insurance element.
As a result the sum assured limit was changed to minimum 10 times of the annual premium from earlier 5 times of the annual premium. This is an important change for anyone who buys investment cum insurance policies like ULIPS or any other traditional plans.
If you are below 45 years of age then the insurance plans will now be offering a minimum sum assured of 10 times the annual premium paid. However, for people above 45 years of age, he/she may get a sum assured of 7 times the annual premium paid.
So, according to section 194 DA, the insurer will deduct TDS of 2 per cent for policies that are taxable. The rest has to be paid by the policy holder. To track such policies where there is less premium to insurance ratio, the Bill announced TDS where the maturity proceeds are taxable from October 1, 2014. One must keep in mind, no TDS will be applicable for maturity proceeds which are less than Rs. 1 lakh.